SALON

Enron

Tuesday, Aug 6, 2002 7:30 PM UTC

“Buy, Lie and Sell High”

How investment banks sold the American economy down the river.

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The U.S. markets’ precipitous decline over the past two years has erased trillions of dollars from the country’s economy since the heady peak of spring 2000, when the NASDAQ hovered at the 5,000 mark, the Dow was flirting with 12,000, and the advantages of a Porsche Boxster and Aeron chair seemed within reach for even the humblest of investors.

Stories of scandal and loss — big and small, international and local — have filled the business pages ever since. But lost in the shuffle of the headlines made by the likes of Enron, WorldCom and Global Crossing was an earlier wave of failures, the once promising online startups that crashed to earth with the bursting of the Internet bubble.

Public attention has been fixated on the sorry images of one CEO and CFO after another making a solemn pilgrimage to Congress to account for the loss of billions of dollars in shareholder equity in huge publicly traded companies. But precious little has been offered to explain the social and economic forces that set the stage for their collapse.

In his new book,” Buy, Lie and Sell High: How Investors Lost Out on Enron and the Internet Bubble,” D. Quinn Mills sets out to analyze what happened. A professor of business administration at the Harvard Business School and the author of a number of books on the high-tech industry, Mills argues that the bubble in Internet and technology-related stocks that developed in the U.S. and international stock markets during the late 1990s was evidence, not of the “irrational exuberance” of ordinary investors, but of a complete ethical collapse on the part of major investment banks, brokerage houses and even the Federal Reserve.

Instead of serving as gatekeepers to the financial markets and shepherds for young companies, as they had traditionally done, Mills says, investment banks such as Merrill Lynch and Salomon Brothers rushed scores of fledgling technology and Internet-based commerce companies to market knowing full well that their business models were suspect and their prospects for success dim.

The reason, he says, was simple: Investment banks collected substantial fees for taking companies public — more than $600 million in fees for companies whose stocks are now trading below $1, according to one report. Even more, the huge opening-day “pops” in share value that accompanied so many dot-com IPOs became a commodity in themselves, which investment banks could mete out to their clients, business partners and other privileged insiders for a quick return. The net effect, Mills says, was a massive redistribution of wealth from the hands of the many ordinary — or “retail” investors — to the pockets of financial insiders, venture capitalists and the moneyed elite.

Mills spoke to Salon by phone from Maine:

You take the title of your book from a quote that the SEC chairman used to describe Jonathan Lebed, the New Jersey teenager who was accused of posting erroneous information on the Internet to manipulate stock prices. Is his story emblematic of the ills of the Internet mania?

Well, yes, I thought it was emblematic because in a certain sense, that’s what very sophisticated financial institutions were doing. They were getting control of stock in any of a number of ways, touting it — saying it was great — selling it to the public and walking away with a bundle. The problem is what they were saying about the companies was not true.

A point you call attention to throughout this book was the willingness of otherwise sophisticated business people, investors and bankers to ignore or discount established business practice and rules of thumb. With eToys.com, for example, you point out that it didn’t take much to see that the company would face serious competition from entrenched brick-and-mortar companies like Toys ‘R’ Us — competition that would make their sales goals ($900 million in sales before eToys could turn a profit) difficult to attain. How do you account for this?

I think it was self-interest. The investment bankers made their money, not on the stock, but on the fees they made in taking the companies public. So they were not long-term investors. And I think they ceased to care whether or not the companies had a real future.

As for the venture [capitalists], they were prepared to try to get out early. They saw an opportunity to build a company and then to sell it quickly and take their profits and run.

What happened was a complete collapse — almost an ethical collapse — of their feeling of responsibility toward shareholders, the public who would buy shares in the companies.

Now some of them will say that they believed in the companies — that they believed in eToys, that they thought it could be successful, that they liked its leadership. But if you look at the way that they behaved — in the [case of eToys] and of the Internet bubble generally — it was quite different. If they really had confidence in these companies, it wasn’t based on their past experience, because in the past they hadn’t done things in the same way. They hadn’t looked for the same kind of leadership. They hadn’t looked for the same kinds of business plans or business models. They hadn’t taken the same time frame.

Was there a kind of “Aha!” moment at which the rules of thumb and the knowledge that was built on years of experience was thrown out?

It happened about 1997, and it was a combination of things rather than a single moment. It was the success of Amazon.com in building their business fast and getting a very substantial valuation even though [Amazon] was not at all profitable. I think a lot of people [in the financial field] looked at that and said, “My god. If they can sell that kind of stock to the public, why can’t we do it?” And as more people began to bring these kinds of companies public, the people within the industry who had held back — the people who didn’t think this was proper, or that it wasn’t going to work in the long term, or that it wasn’t legal, or whatever — began to say, “Everybody else is doing it, so if we don’t do it, we’re not in business.” So rather than a single moment, it was more of a steady buildup over a period of time.

When many people think of “dot-com IPO” they tend to think of sky-high valuations, but you actually contend that investment banks undervalued dot-com shares that were offered to the public. Could you explain this?

In the midst of the Internet bubble, you had two things going on. The sales forces of large brokerage houses and mutual funds, along with the business media — and even the chairman of the Federal Reserve — were hyping the idea, very strongly, that this was a new economy. New rules applied. There was a permanently higher level of valuation. Et cetera. So there was a willingness to pay substantially for shares in these companies.

Now you have an investment bank that brings a new company public. In that kind of an environment, with a major investment bank sponsoring that company and a major venture firm standing behind it, people would be willing to pay a great deal.

The investment banks were slow to understand, I think, how much the demand had increased for these things. There weren’t a lot of shares available, if you look at the total demand, and so they were pricing them high by the standards of the investment banks — and by the way, the investment banks actually knew a good bit more about these companies than the people they were selling [the companies] to, and they weren’t telling them what they knew. The banks knew the companies were much weaker than they were representing them to be. So the banks were setting the initial offering prices somewhat more modestly than the circumstances provided.

The result of that was that there was a big rise in the value of the shares the minute they went public. So if you took it public at $10, the initial trades would be at $20 and $25. That created a huge amount of value that could be handed to friends of the investment banks.

Who were in turn “flipping” the stock?

Yes. If you got the stock at $18 and sold it immediately, you could double your money. That was an asset, if you will. And the investment banks began allocating those assets to their friends. And that’s one of the practices that is being investigated today.

Why was that bad for the companies involved?

The companies got money in their IPO based on the [initial offering price of] $18. If the stock is immediately selling for $36, the companies could have gotten the difference, not friends of the investment banks. In a sense, the companies were being robbed. This wasn’t discussed in the press, but it was a huge issue with the management of these companies. Because, in a sense, suppose they took 2 million shares out at $10 a share. They get $20 million back less what they pay to the bank. But if the stock is selling immediately at $20 a share, they would have gotten $40 million for the company to use and have paid essentially the same fees.

This is evidence of colossal wrongheadedness on the part of institutions that most Americans thought were pillars of our economy. Do you see any evidence that these institutions are chastened by what has happened?

Investment banks are chastened and some are downright frightened. They think they may have peripheral liability. On the other hand, all the incentives remain in place for institutions to continue to do what they did. I think its certain that this will happen again — and maybe even on a bigger scale. I don’t know exactly when and I don’t know what form exactly it will take. It could be another Internet bubble. It could be another technology bubble, just not the Internet — something in the biotech industry, maybe. On the other hand it could be something quite different. The incentives to make a great deal of money without the likelihood that you’re going to have to give much of it back — the reality is our laws have neither stopped this nor punished it.

How does Washington’s reaction compare to its reaction to previous bubbles? I’m thinking about 1929, in particular, but there have been others as well.

Well, there was a huge difference in the government’s reaction in ’29. Back then we set up a whole new regulatory scheme and a whole new and substantial body of law. The difference now is that same body of law is still in effect and people have figured out how to get around it. People do that in 70 or 80 years. And the law was not effective in preventing this [Internet bubble] at all.

The changes to the law that are being debated now in Congress are useful, but they’re very limited. They do not address the crazy-quilt pattern of regulations that we have, which has huge gaps in it that often protect the most sophisticated investors and leaves the least sophisticated to the whims of the market, which is exactly the opposite of what its supposed to do. [Congress] is not really trying to make any sense of that. They’re proposing some additional regulations in some areas — regulations that in many instances we’re not even certain are going to be effective. So the response out of Washington this time thus far is much less than is merited and much less than happened [in the wake of previous crashes].

Alan Greenspan famously frowned on the run-up in stock prices as “irrational exuberance,” a term that is likely to go down in history. What are the history books going to say about what he actually did to prevent any of this?

I think they’re going to say that he did very little to prevent it and a lot to encourage it.

[Greenspan] spoke about “irrational exuberance” I think in 1996, and then really did not return to that theme — the Fed did really not tighten money as it should have to slow down this asset bubble. The Fed debated this continually; the regional Fed banks debated it. The national Fed debated it — whether or not the Fed should intervene to stop this bubble from inflating, and they chose not to do it. In fact, Greenspan was continually heaping praise on the new economy and talking about a “new plateau of low inflation and high productivity in the American economy” — all of which he knew perfectly well was being interpreted as an endorsement of the [Internet] bubble.

You group Enron with the rest of the dot-com companies, not because it was a technology company per se, but because it used the enthusiasm of the bubble to its own ends. Could you explain that?

Enron was the old-economy company — a kind of slow-moving energy company — which was most effective in the capital markets at turning itself into a new-economy company. It became an Internet-based trader in energy, futures and that sort of thing. It reinvented itself as an Internet company. And that’s the reason [it is included in the book]. It’s the bridge between the old economy and the new economy in the period of the Internet bubble. It did most successfully what a whole lot of other companies wanted to do.

What they didn’t know then — and I didn’t fully understand because we’re learning more about it day by day — was the degree to which that wasn’t real but was based on fraud.

You look at and profile a number of German dot-coms in your book in addition to American companies. Where did the idea to mirror the bubble in Germany and the U.S. come from?

It had been remarked on a number of times that the same kind of bubble was going on in Europe and particularly in Germany. Dot-com companies, Internet companies, et cetera. And so I got interested in — since that had happened — in what had been the consequences. Had they been the same as the United States’?

The answer is that they had largely been the same in terms of the volatility of the market. They had been largely the same in terms of their impact on the companies — the dot-com entrepreneurs. They had been largely the same in terms of the causes, the way that the banks and the venture firms had changed what they were doing.

Where they had been different was in their consequences for investors, because Germany does not permit anywhere near the amount of pension money and life savings of people to go into the stock market as we do here. And we only started that a few years ago, where we started to allow people to seriously manage tax-protected pension funds on their own. So what we did was essentially to draw all these people in. A much larger percentage of the American population is in the stock market than in Germany: almost 50 percent [of Americans], which is enormous. In Germany it’s much lower than that — back where we used to be — and they have much stronger controls and regulations.

You note early on in your book that the Internet bubble amounted to a huge redistribution of wealth from the many [retail investors] to the few [VCs, investment banks and other insiders]. What do you think the long-term consequences of that redistribution will be?

Very hard question. Two or three things. I think [the Internet bubble] was something that the financial markets or institutions liked. In my book, I quoted one industry insider as saying that the problem wasn’t the bubble — it was its aftermath. So there will be tremendous incentives to try to do the same thing again. No matter how much people are now wringing their hands and saying, “Oh, we have a hangover. We shouldn’t have done that.” The reality is that there are tremendous incentives to try to repeat it because it was so successful for them.

The second thing is that it has created a huge crisis of confidence in the capital markets. That’s the reason that the president and the Fed can’t get this thing under control and why these bills that are being reconciled in Washington are not stopping the slide of the market. It’s taken people a while to understand that the money they lost in the markets is not coming back. That many of those companies are gone for good — and so is their money. They’re only really beginning to understand that now, as you see people [who were retired] going back to work, et cetera. And I think [ordinary investors] now feel like the markets are a deck that’s stacked against them.

What do you think the 1990s would have looked like had investment banks and stock analysts and venture capitalists stuck to their “principles” and to conservative business practices, rather than throwing all those things out the window?

Same level of economic growth. Same or a little less inflation. There would have been a better economy and you wouldn’t have had the economic recession we’re in now with the risk of a substantial decline behind it. So you would have simply have had better economic growth. [The Internet bubble] did not contribute to the success of the American economy during [the 1990s]. In fact, if anything, it constrained it. And when it bust, it risked it entirely.

Paul F. Roberts is a writer living in Watertown, Massachusetts. More Paul Roberts.

Monday, Jun 28, 2010 8:29 PM UTC

The Wall Street Journal’s Freudian tweet

The newspaper declares Enron-inspired Sarbanes-Oxley law struck down by Supreme Court. Er, not so fast

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The Wall Street Journal's Freudian tweet

The Wall Street Journal has never made any attempt to hide its antipathy for Sarbanes-Oxley, the Enron/Worldcom-inspired law that attempted to increase oversight on public company accounting. The Journal’s position is that the law imposed costs on businesses that hurt the overall economy. Since this is the Journal’s editorial position on any legislation that tries to rein in the business world, no one was ever required to take their rantings too seriously (even though, it is true, Sarbanes-Oxley has resulted in compliance costs that can be challenging for smaller public firms).

So perhaps that explains why the Wall Street Journal’s flagship Twitter feed (as pointed out by Felix Salmon) jumped the gun this morning, reporting via a tweet practically dripping with glee that Sarbanes-Oxley had finally been vanquished!

BREAKING: Supreme Court strikes down Sarbanes-Oxley, the landmark anti-fraud law. Much more to come at http://wsj.com

Except, as the Journal and other publications soon reported, the court did no such thing. The court struck down a part of Sarbanes-Oxley that had to with the president’s power to fire members of the Public Company Oversight Accounting Board, the regulatory body set up by Sarbanes-Oxley to watch over the accounting firms that audit public companies.

Currently, members of the PCOAB can only be fired “for cause.” The court ruled that this violated the Constitution’s “separation of powers” principles. Now the president will be able to fire the overseers “at will.”

Critics of Sarbanes-Oxley had hoped that the court would use this flaw to throw out the entire law. But that’s not happening. The law stands. The proper tweet should have been “Supreme Court strikes down minor part of Sarbanes-Oxley; law remains in effect.”

Maybe it was an honest error — albeit retweeted around the world at near the speed of light. Or maybe it was an unintentional revelation of the deepest hopes and desires of the Wall Street Journal’s shell-shocked editorial core — the subconscious revealed in 140 characters or less. With just days to go before a new avalanche of financial sector regulation becomes law, the Journal saw one bright spot in the advancing gloom — Sarbanes-Oxley would be no more! And the paper (or a Twitter-feed monitoring intern) got a little excited. Hey, no worries, it’s happened to the best of us.

But the least the paper could do would be a follow-up, one-word tweet: Ooops! Any self-respecting blogger would have felt that much responsibility. But the Journal blithely tweeted forward, gradually approaching the truth, with nary a look back. Tut tut.

UPDATE: The man behind the mistaken tweet, Zach Seward, comes admirably clean in Felix Salmon’s comments.

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Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21. More Andrew Leonard.

Thursday, May 6, 2010 4:01 PM UTC

Jack Abramoff, Eliot Spitzer: A tale of two swindlers

What connects the disgraced N.Y. governor and the jailed D.C. lobbyist? Oscar-winner Alex Gibney explains

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Jack Abramoff, Eliot Spitzer: A tale of two swindlersFormer New York governor Eliot Spitzer speaks at the Reuters Global Financial Regulation Summit 2010 in New York April 28, 2010. REUTERS/Brendan McDermid (UNITED STATES - Tags: BUSINESS HEADSHOT)(Credit: © Brendan Mcdermid / Reuters)

What do the following have in common: Imprisoned Washington lobbyist Jack Abramoff, disgraced ex-New York Gov. Eliot Spitzer, the collapse of Enron, the Bush administration’s torture policies, the late gonzo journalist Hunter S. Thompson? Before we go chasing some thread of thematic continuity — and we could definitely do that — let’s observe the emotional connection. All of those people and things provoke or embody big, visceral reactions: shock, outrage, disgust, amazement.

The other thing they have in common, of course, is Alex Gibney, who has made movies about all those subjects, including the Oscar-winner “Taxi to the Dark Side,” the box-office breakthrough “Enron: The Smartest Guys in the Room” and “Gonzo: The Life and Work of Dr. Hunter S. Thompson,” which wasn’t a big hit but strikes me as a key work in understanding what Gibney is up to. He thrives on those oversize emotions mentioned above, channeling them into intentionally ambiguous pop documentaries that inhabit a nuanced middle ground between journalism and entertainment.

As he would be the first to admit, Gibney’s films depend on the work of old-school investigative journalists, those lumbering sauropods who take months or years to reach their destinations. His particular genius lies in taking their facts and figures, their reams of insider testimony, and spinning them into compelling on-screen yarns, loaded with archival news footage, goofy animations and special effects, dramatic re-creations and comic-relief moments. Yet if Gibney’s films are a long way from the purist cinema-vérité documentary tradition, they’re closer in spirit to old-fashioned muckraking than to the clown-prince pranksterism of Michael Moore. (Gibney’s voice can be heard in his films, both literally and figuratively, but he never appears as a character.)

Even by Gibney’s prolific standards, 2010 is shaping up as a bonanza, or perhaps an unmanageable pileup. When I met him recently at the New York offices of Magnolia Pictures, we were officially talking about his explosive, hilarious and eye-opening Abramoff film, “Casino Jack and the United States of Money,” which Magnolia releases in theaters this week. But Gibney also had — count ‘em — three other new movies premiering in the Tribeca Film Festival, at least if you count his section of the anthology documentary “Freakonomics,” adapted from Stephen Dubner and Steven Levitt’s bestselling books. (Other co-directors of that film are Seth Gordon, Eugene Jarecki, Morgan Spurlock and the “Jesus Camp” duo, Heidi Ewing and Rachel Grady.)

Gibney also unveiled a sneak preview of his as-yet-untitled Eliot Spitzer documentary at Tribeca, along with “My Trip to Al-Qaeda,” a film based on journalist and author Lawrence Wright’s solo theater piece about his quest to find the roots of Islamic terrorism. (That film will play on HBO, and perhaps also receive limited theatrical release. The commercial fate of the Spitzer film remains undecided.)

“Casino Jack” veritably revels in the rollicking, stranger-than-fiction details of the Abramoff scandal, in which a brilliant and charismatic lobbyist pimped out much of the United States Congress to big-money corporate clients, along the way defrauding Indian tribes, the territorial government of the Mariana Islands and other easy marks. Beyond that, though, Gibney is fascinated by the scandal’s larger implications — and it’s there that we begin to see the conceptual thread that ties his films together. Abramoff was no rogue out to enrich himself (although he did that too) but a committed right-wing ideologue who permanently changed the rules of the game in Washington. He embraced and embodied that old gag about the Golden Rule: Those who have the gold make the rules.

As always, Gibney was a cheerful, upbeat conversationalist in person. He’s a film buff who stays busy at festivals catching other people’s work, and in an interview context he delivers concise, on-message sound bites, not dark, philosophical jeremiads. Still, as I told him, I sense a pattern here, whether or not it’s entirely conscious: Gibney is documenting the not-so-slow and not-so-gradual demolition of the American dream, the interlinked vision of freedom, democracy and capitalism that has been so influential in the recent history of the world, and now seems to be in potentially terminal decay.

So, Alex, we’re here to talk about “Casino Jack and the United States of Money,” but you’ve got two other films that are either complete or almost complete. And then there’s “Freakonomics,” which you directed part of. I think you should write some kind of self-help book on how to get stuff done. Are you one of those people who’s incredibly organized?

Man, that would make everybody who knows me howl with laughter. I may be the world’s most disorganized person. But I do put in the hours. I should probably join Filmmakers Anonymous. Stop me before I say yes again!

You know, you could look at your films and describe them as miscellaneous. Generally you’re taking the work of journalists and adapting it for the screen. But when I look at them, I see a congressional corruption scandal, a major corporate scandal, a disgraced politician and a dead journalist who spent his life excoriating the stupidity and corruption he saw around him. Is there a pattern?

Maybe if you see it, you’ll let me know. [Laughter.] There are clearly certain things that interest me, and I seem to go there. But a pattern? I don’t know.

Well, if I were a graduate student trying to write a thesis about you, I might suggest that these are all aspects of the decline of America since 1980 — the legacy of the Reagan revolution and the triumph of conservatism in American politics.

Well, there’s a theme in that. I think that’s the big story. Now we’re seeing that the net result of the Reagan revolution was the Wall Street meltdown. Take away all the rules and regulations, and what do you get? Meltdown. So I think that’s a theme.

But the other thing that’s increasingly interesting for me is human behavior. What makes people do the strange things they do? How do good people go bad? How do people abuse power? Those are big things for me.

You’re showing your movie about Eliot Spitzer at Tribeca, but it has no title yet and we’ve all been asked not to write about it. So I take it you don’t think it’s ready to roll?

I’m taking my cue on the Spitzer film from what happened with “Casino Jack” at Sundance. We thought it was finished. But seeing it with an audience, who weren’t my friends or anything, you learn things about how it plays. So we made it a lot shorter, we took at some narration, we just shifted stuff around. I would say the Spitzer film is largely finished, and now we’ll see how people respond. We may make a few adjustments.

Your other new film is “My Trip to Al-Qaeda,” which — well, how would you describe it? Is it an adaptation of Lawrence Wright’s performance piece?

Yeah, in some ways it is. He did a one-man play called “My Trip to Al-Qaeda,” which is like “my summer vacation,” except in the Middle East. What intrigued me was that it was an everyman’s look at al-Qaida — why they attacked us, and why they came to be what they were. In making the film, we filmed the play, but then we enhanced it. The set of the play was Larry’s study, but it also included a TV screen. We made that TV screen significantly bigger on our set, and used it as a magic portal.

There’s a kind of time and space travel in the film, where we go to Cairo, to London. We also travel through space and time to the caves in Afghanistan, to Saudi Arabia, so that you can see and feel these places in addition to traveling on Larry’s personal journey, which is his play.

Getting back to “Casino Jack,” which is a movie about a scandal that was widely covered in the media when the story broke, five or six years ago. It seems as if you’re arguing that people may know Abramoff’s name, and maybe the general outlines of the story, but may not understand its importance.

In some ways, he assembled the tool kit that lobbyists are still using. Now, people will object to that: “Absolutely not! Jack Abramoff was one of a kind! He was completely outrageous.” Well, yes. He was outrageous, and he was way out of control. But he used the same tool kit everybody uses today: the rapacious use of not-for-profits to hide trips, to hide agendas, to hide money flows. The revolving door, where you get staffers from senators’ or congressmen’s offices and put them into your lobbying shops so you can influence votes, influence legislation. The use of entertainment and skyboxes — there are different rules now, but there are also ways to get around them. Biggest of all is the way you manage money to influence legislation, in a way that skirts the prohibitions on quid pro quo. It’s about going inside the kitchen in the world’s biggest restaurant and seeing how the sausage is made. Jack Abramoff was the master chef in the world’s biggest restaurant.

We wonder why Congress is dysfunctional, why they’re not doing the people’s bidding, why everyone seems to hate them. The reason is, the system is broken, because it’s all based on money. By looking at Jack’s story, you can see how that happened.

And Jack’s story — first of all, it’s hilarious and spectacular. It’s globe-girdling, there’s a murder in it, there are sweatshops in Saipan, dirty deals in Russia, arms whistling to the West Bank. But at its heart is the very stuff that is breaking our system of democracy.

This was the biggest congressional corruption scandal ever, at least at the time. But did the level of corruption that Abramoff represented become the new normal, in a sense? Because in the film you suggest that even more dramatic stuff has happened since his downfall.

The dispiriting thing is that Jack Abramoff, in the wake of the financial lobbying of the last few years, looks like a piker. I mean, he’s Podunk! The financial lobbyists, and the medical and pharmaceutical lobbyists, have taken what Abramoff did to a new level.

You mentioned the fact that the Abramoff story is highly entertaining, which it certainly is. And while it’s unlikely that your viewers will find him likable or sympathetic, let’s just say this: He makes one hell of a lead character.

There is another film, which is still called “Casino Jack.” I think they’re going to change the title. It’s a fictional version of this story, in which Kevin Spacey plays Jack Abramoff. I’ve seen the film, and Kevin Spacey is very good in it. But he’s no Jack Abramoff. [Laughter.]

Jack Abramoff is one of a kind. As Neal Volz, a former staffer for congressman Bob Ney who later worked for Jack, says, “Jack could talk a dog off a meat truck.” He was that persuasive. He was the ultimate salesman, but he was also a man of great imagination. He was a film buff, who saw his own life as an action film or a spy thriller. As a result, he imagined himself into situations that, you know, make for pretty good moviegoing.

Suddenly, we’re in Angola, in Africa, where Jack is holding a sort of right-wing Woodstock [in June 1985], shooting machine guns with a bloodthirsty character named Jonas Savimbi and a guy named Adolfo Calero, who used to run the Contras in Nicaragua. And they’re all holding hands after a lot of machine-gun shooting and singing a version of “Kumbaya” with this guy Lew Lehrman, who later ran for governor in New York state, and who gave George Washington’s bowl to Jonas Savimbi, this bloodthirsty dictator. You can’t make this stuff up!

Yeah, I literally couldn’t believe that entire sequence. It’s so amazing. It seems impossible, totally fictional. Was it difficult to find documentation of that event?

It sure was. We got lucky or we were good, one of the two. We tracked down a cameraman who had been there, and he still had 10 hours of footage. We also got Jack’s film, which was amazing. Jack was a film producer. He produced “Red Scorpion,” with Dolph Lundgren [released in 1989], and “Red Scorpion 2.” I think the Angola affair — it taught Jack that it wasn’t a big enough deal. That was his documentary version, and he was always going to make an action film. So he reinvents Savimbi into Red Scorpion, and has Dolph Lundgren as the action hero, shooting up everybody and performing weightlifting tricks. And that’s what Jack was as a young man, a weightlifter. So Dolph Lundgren is standing in for Jack.

I have a fun thing at the beginning of the film. There’s this thing that Jack said to somebody, which we transposed into an e-mail: “Documentary? You don’t want to make a documentary. Nobody watches documentaries. You want to make an action film.”

So to some extent, this film is an action film. That’s what I told Jack: “It’s an action film, man. People are going to be entertained.” I think it’s also a comedy, at least in parts. But unfortunately it’s a comedy in which the joke’s on us.

So you’ve had contact with Abramoff. What was that like?

Very interesting. I visited him in prison, and found him to be a very engaging character, very funny, good storyteller. He loves to quote movies.

Did he know who you were?

He did. I think — no, I know — that there was great reluctance to meeting with me. It wasn’t like I had a big record as a movement conservative, which was something we joked about. We agreed on one thing: I didn’t see him as a bad apple. I saw him as spectacular evidence of a rotten barrel.

He was at the center of things, not on the periphery. Everybody else was trying to make him the scapegoat: “Oh, we got rid of Jack Abramoff. Everything’s fine!” I told him, and I firmly believe, that he was at the center. He was doing stuff to the extreme, yes, over the top. But he was doing the same stuff everybody else was doing.

Well, you make a pretty strong case that Abramoff wasn’t in it for the money, or not entirely. He had an ideological motivation. He actually believed he was doing the right thing.

Right. I think he was a zealot. Unlike his partner, Mike Scanlon, who was in it for the money, Jack Abramoff was a zealot. He believed in the principles of the Reagan revolution. He was very anti-Soviet, but he also wanted to do what Grover Norquist has suggested: make government so small you can drown it in the bathtub. Denude it of its resources. Destroy the government, in effect.

Do you see any parallels between Abramoff and Eliot Spitzer? Here are these two brilliant, headstrong guys from opposite sides of the political spectrum, who appeared to be very idealistic, driven by ideology, but who allowed themselves to become corrupted.

I don’t know that Eliot was corrupted by his ideology, but I think he’s a character who did something that was wildly unexpected. If there is a parallel, it’s hubris. I think Jack became so entranced with his outsize reputation that he began to believe his own press releases. And I think Eliot Spitzer — he started seeing prostitutes at the moment of his greatest political influence. He was on his way to being governor, overwhelmingly popular among both Republicans and Democrats. And at that very moment, at the top of his game, he began to see prostitutes. Dudley Do-Right did wrong.

Of the two of them, maybe Spitzer was the real hypocrite. You can call Abramoff a lot of things, but not that.

I don’t think you could really accuse Jack of being a hypocrite. Jack was corrupt, and I don’t think you can say that Eliot Spitzer was corrupt. But he was hypocritical, there’s no doubt about that. Look, he had increased penalties for johns in New York, and he had prosecuted escort services. Now, I have rather politically incorrect liberal views about whether prostitution should be legal. [Laughter.] But the fact was that it was illegal, and he was the governor of New York, who had convinced people to elect him because he was Mr. Clean. So, yes, he was a hypocrite. And Jack wasn’t.

“Casino Jack and the United States of Money” opens May 7 in New York, Los Angeles and Washington; May 14 in Chicago, Phoenix, San Diego, San Francisco, San Jose, Calif., Santa Cruz, Calif., and Seattle; May 21 in Atlanta, Boston, Monterey, Calif., Nashville, Palm Springs, Calif., Philadelphia, Sacramento, Tucson, Ariz., and Austin, Texas; May 28 in Charlotte, N.C., Cleveland, Dallas, Kansas City, Miami, Minneapolis, Portland, Ore., Salt Lake City, San Antonio and Santa Fe, N.M.; and June 4 in Houston and Waterville, Maine, with more cities to follow.

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Friday, Apr 30, 2010 4:31 PM UTC

Exclusive Alex Gibney clip: Jack Abramoff and healthcare

See a deleted scene from Oscar-winner Alex Gibney's new movie about the guy who dosed Congress with dirty money

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In an exclusive premiere for Film Salon readers, here’s a deleted scene from Oscar-winning director Alex Gibney’s upcoming documentary “Casino Jack and the United States of Money.” The film recounts the horrifying, mesmerizing saga of über-lobbyist Jack Abramoff and the congressional corruption scandal of the late ’90s and early 2000s that dramatically changed the landscape of Washington (and definitely not for the better).

In this Webisode, Gibney explores the elaborate money shuffle through which Abramoff channeled money from supposedly legitimate lobbying clients (like Indian tribes) through Republican PACs and Big Pharma front groups, who in turn wrote industry-friendly legislation that was passed intact by the GOP-led Congress. I’ll have an interview with Gibney and more coverage of the film next week. “Casino Jack and the United States of Money” opens May 7 in major cities, but you’ll only find this clip here (at least until the DVD comes out).

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Andrew O

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Thursday, Mar 18, 2010 12:20 AM UTC

It’s time for Wall Street to pay

We need accountability -- as in, jail time where warranted -- for those who created the financial disaster

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It's time for Wall Street to payJames Cayne of Bear Stearns, John Thain of Merrill Lynch, and Lloyd Blankfein of Goldman Sachs

Almost everybody’s got their noses out of joint these days — and no wonder. If there’s a significant American institution that hasn’t failed in its fundamental public responsibility over the past decade, it’d be hard to identify.

Writing in Time, Christopher Hayes puts it succinctly: “Nearly every pillar institution in American society — whether it’s General Motors, Congress, Wall Street, Major League Baseball, the Catholic Church or the mainstream media — has revealed itself to be corrupt, incompetent or both. And at the root of these failures are the people who run these institutions, the bright and industrious minds who occupy the commanding heights of our meritocratic order.”

Me, I blame the combination of runaway baseball salaries, the “talented and gifted” movement in schools, and the tyranny of SAT scores. I’m only half-joking. Once free agency drove even an average third baseman’s pay into the seven-figure range formerly reserved for tycoons who owned major industries or medium-size Midwestern states, practically everybody with SAT scores over 1,400 figured they deserved to earn as much as Aramis Ramirez.

The differences being that quality third basemen are a lot rarer than Ivy League MBAs, and are publicly and relentlessly evaluated. Steroids or no steroids, one bad season and they’re replaced by a 22-year-old from the Dominican Republic. That’s one of the things keeping us fans hanging on.

Not so in the corporate world. As recently as 2008, the geniuses running Wall Street investment banks bankrupted their companies and came perilously close to collapsing the world financial system. And what happened? A few CEOs departed via “golden parachute,” but most executives stayed shamelessly in place, profited from multibillion-dollar TARP bailouts and then began awarding each other obscene bonuses almost before the smoke cleared.

Meanwhile, a substantial part of a generation’s retirement savings vanished into thin air. Had the Bush administration succeeded in “privatizing” Social Security back in 2005, the damage could not have been worse.

Over time, American institutions appear to be growing steadily less accountable. Hayes cites the Catholic Church’s sex abuse scandal, which strikes me as a red herring. Yes, the bishops averted their eyes, placing the putative well-being of the church above children. Yes, ecclesiastical lectures on sexual sin are a bit harder to take. But the church has been hierarchical, secretive and self-protective since forever. Moreover, as recent developments in Ireland and Germany show, the problem is international.

More to the point, “look at CEO pay,” Hayes urges. “In 1978, according to the Economic Policy Institute, the ratio of average CEO pay to average wage was about 35 to 1. By 2007 it was 275 to 1.” In comparison, the ratio remains approximately 20 to 1 in most European countries; roughly 11 to 1 in Japan. Yet people complain about labor unions.

Hayes cites Nell Minow, an expert in corporate governance nicknamed “The CEO Killer” by Fortune magazine, to the effect that all many executives know how to do is “manipulate the levers of governance and devise ingenious methods of guaranteeing themselves windfalls regardless of their company’s performance.” The unvarying defense of the latest Wall Street bonuses, of course, is that the talented and gifted recipients might otherwise change teams. Why, perish the thought.

Only recently, reporters have begun catching up with the bankruptcy examiner’s report on the failure of Lehman Brothers investment bank, the precipitating event in the 2008 financial crisis. According to law professor and former white-collar prosecutor Peter J. Henning, writing in the New York Times’ DealBook blog, the 2,000-page document “discusses some accounting gimmicks that are eerily reminiscent of how Enron tried to prop up its balance sheet back in 2001 before it collapsed.”

And for which, it will be recalled, a number of Enron executives went to prison. The details can be dauntingly complex. But what they amounted to were a series of short-term accounting tricks designed to make the bank’s financial health appear robust as it “teetered on the brink of ruin.”

The examiner’s report calls CEO Richard Fuld “grossly negligent” at minimum, and reserves even harsher terms for Lehman’s accounting firm, Ernst & Young. Remember when accounting was a respectable profession? No more. They’re buccaneers today.

The basic gimmick was called a “Repo 105,” moving bad real estate-based assets off the books by using them as collateral for short-term loans just long enough to file quarterly reports, then unwinding the deals as quickly as overnight.

It’s as if your brother-in-law assumed your debts and deeded you his assets overnight so you could qualify for a bank loan, then took them back. Except Lehman was doing it to the tune of $50 billion a pop. You and your brother-in-law would go to prison for that, and so should somebody at Lehman Brothers. Hopefully, somebody with a brilliant academic record and impeccable social credentials, so the rest of them start paying attention.

© 2010, Gene Lyons. Distributed by United Feature Syndicate, Inc.

 

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Arkansas Times columnist Gene Lyons is a National Magazine Award winner and co-author of "The Hunting of the President" (St. Martin's Press, 2000). You can e-mail Lyons at eugenelyons2@yahoo.com. More Gene Lyons.

Friday, Jan 29, 2010 10:29 PM UTC

Sundance: Searing portrait of a top lobbyist

Oscar-winner Alex Gibney talks about his new Jack Abramoff expos

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Sundance: Searing portrait of a top lobbyist18 Aug 2005, MIAMI, FL, USA --- Washington lobbyist Jack Abramoff leaves the courthouse in Miami August 18, 2005. Abramoff, a central figure in investigations involving House Majority Leader Tom Delay, plans to fight charges he defrauded two lenders of $60 million to buy a casino cruise line, his lawyer said on Thursday. Abramoff, a well-connected Republican lobbyist, and Adam Kidan, his partner in the $147.5 millions buyout of SunCruz Casino five years ago, were indicted by a federal grand jury in Fort Lauderdale, Florida, on August 11. --- Image by © CARLOS BARRIA/Reuters/Corbis(Credit: © Carlos Barria/reuters/corbis)

PARK CITY, Utah — Alex Gibney’s new documentary, “Casino Jack and the United States of Money,” which premiered at Sundance this week, is much more than a shocking and highly entertaining movie about Jack Abramoff, the über-lobbyist at the center of the biggest corruption scandal in congressional history. It’s a portrait of a political system that has been poisoned down to the root by the pernicious influence of big money, by the buying and selling of connections and influence, and by a radical free-market ideology that has been systematically employed to undermine the principles of representative democracy.

As the Oscar-winning director of “Taxi to the Dark Side” and “Enron: The Smartest Guys in the Room” told me in our conversation in a Park City restaurant, the Abramoff case was not an isolated instance of criminality, but a symptom of a much larger disease. As in his earlier films, Gibney dramatizes the work of America’s best investigative journalists, and directly attacks the “bad apple” hypothesis that’s repeatedly employed to explain away disturbing tales of corruption and malfeasance, from Enron to Abu Ghraib to Abramoff.

Magnolia Pictures will release “Casino Jack” in theaters this spring. For now, here’s Alex Gibney on the outlandish Abramoff tale and its rogue’s gallery of supporting players — from Tom DeLay to Grover Norquist to George W. Bush — why it definitely still resonates in the Obama era, and what it means for our imperiled republic. 

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